Forget the Whopper. How about doughnuts and coffee?

Burger King

Burger King is looking to expand by acquire Canadian coffee and doughnut chain, Tim Hortons.

The fast food industry is not the easiest place to be right now, even for a [Burger] King. The chain is talking about a merger with Tim Hortons, a coffee and doughnut staple in Canada. So, how does it help one fast-food chain to acquire... another one?

“The market is incredibly competitive,” says Darren Tristano, Executive Vice President with Technomic, a food industry research and consultancy based in Chicago. He says growth is very low – just about 3 to 3.5 percent. Inflation for the industry is also expected to be about 3.5 percent, thanks to rising costs of commodities like beef. So, it’s almost a wash.

“We don’t see any real growth for the restaurant industry as a whole,” Tristano says.

Low-income customers haven’t seen much if any wage growth, so they’re holding onto their cash. Higher income customers have been wooed by higher-end places like Chipotle and Panera – “fast casuals” as Morningstar’s senior restaurant analyst RJ Hottovy calls them. “That’s the sweet spot in the industry,” and it is not a spot occupied by Burger King.

But if Burger King can’t immediately control its customers’ spending, it can control its own, and that has been one area of focus ever since the fast food chain was bought and taken by Brazilian private equity firm 3g in 2010.

“They have been cutting costs to free up resources. And they’ve been running the business less like a restaurant, and more like a financial company,” says Tristano.

Whereas at one point 10 percent of Burger King’s restaurants were actually owned and operated by Burger King, the company washed its hands of all of them, and now leaves the operation of its locations (and the exposure that comes with direct ownership from labor costs to maintenance budgets) to franchisees, says Charles Pinson-Rose, director at Standard and Poor's. “It’s all royalty revenue, and it allows the company to improve cash flows.”

The chain has aggressively tried to keep up with McDonalds on menu items, revamping its menu several times. It has expanded successfully in Brazil, China, and Russia. Pinson-Rose echoes an oft-heard sentiment in summing up the King’s reign of late: “Overall they’ve largely been successful, but the reality is it’s a very difficult environment for food service in the United States.”

Ironically, that’s exactly where acquiring Canadian firm Tim Hortons could help Burger King. Tim Hortons is successful in one of the few arenas that seem to be looking up for fast food: coffee.

“Starbucks continues to do very well with strong profit margins, you see McDonalds make coffee a key priority, and I think this partnership strengthens Burger King’s coffee offering as well,” Hottovy says.

“The push out of Starbucks is to push its own packaged coffee, and Tim Hortons has the same kind of aspirations,” says Hottovy. Partnering with Burger King could help Hortons and Burger King both on that front.

Of course, the tax benefits and easier access to cash abroad that Burger King would get by reincorporating in Canada... well, that can’t hurt.

About the author

Sabri Ben-Achour is a reporter for Marketplace, based in the New York City bureau. He covers Wall Street, finance, and anything New York and money related.

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